What’s the Difference Between COLA and Pay Raises?

Federal Employee Articles

What’s the Difference Between COLA and Pay Raises?

Posted by Benchmark Financial Group, LLC
12 months ago | November 5, 2018

Each fall, a cost-of-living adjustment (COLA) is announced, and news this impacts Social Security beneficiaries and some federal retirees. Essentially, it means that these individuals will receive a bit more money in their monthly checks.

However, current federal employees often get this news mixed up with news regarding their own pay. “Does this COLA impact us”, you might wonder. “Does this mean I’m receiving a raise?”

It’s an understandably confusing situation. So, first, let’s take a look at how COLA is determined for Social Security recipients and federal retirees. This process is established by law, and is automatic each year.

After data from the Consumer Price Index (CPI) is analyzed, Social Security beneficiaries receive an increase in benefits approximately equal to the rate of inflation reported by the CPI-W (a specific index contained within the overall CPI).

As for federal retirees, CPI data is also utilized to determine an increase in annuity payments. However, the calculations for those increases are a bit more complex, and based upon a different formula. The increases are automatic, though, and have nothing to do with current political debates and decisions.

As for federal employees, the decision to increase pay is determined on a year-to-year basis. Usually, the President will release a decision regarding pay increases around late August of each year, to begin with the next fiscal year. This year, Congress is involved as they discuss overriding the proposed pay freeze, but this is not always the case. The bottom line is that federal employee pay increases are not automatic, and won’t always directly reflect inflation data from the CPI.

In some years, federal employees get a higher raise than retirees and Social Security recipients. In other years, the opposite is true. These increases rarely have much to do with one another.

If and when you do receive a raise, that is when our guidance comes into play. Adjusting your Thrift Savings Account contributions is usually a good idea during those years, so that you can take advantage of the opportunity to better prepare for retirement. If you have questions about how to best put a raise to good use, please give us a call and we’ll be happy to help.

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